Education Next is a journal of opinion and research about education policy.

Going Exponential: Growing the Charter Sector’s Best

The for-profit and nonprofit sectors feature hundreds of examples of organizations that have “gone exponential” – growing at rates of 40 percent or higher for a decade, or longer. Meanwhile, the nation’s best charter school operators are growing much more slowly. The 10-year growth rate in charter enrollment is about 17 percent. But according to the National Study of Charter Management Organization Effectiveness, the average CMO is adding only 1.3 schools per year. Only five CMOs in the study expect to have 30 schools in their networks by 2025.

Here’s the problem: the top 10 percent of charter schools in the U.S. serve 167,000 children annually. At the current sector growth rate, they’ll reach 1.7 million kids by 2025. But millions of low-income students in the U.S. are not on paths to diplomas because they are not reaching basic standards, and millions of other children also need better options. If just this elite subset of charter schools grew at the 40 percent rate we see in other sectors, they could serve some 26 million students every year by 2025. Even if only half of the nation’s best charter operators grew that quickly, they could collectively serve every low-income child in American in 15 years.

Here are a couple of quick examples. Rapid exponential growers typically generate the money they need to expand early on, by achieving positive operating margins and revenue growth. These results attract investors, enabling rapid growers to invest in innovation and systems. What if, say, the top 10 percent of charter schools could effectively charge more for their service, earning performance-based bonuses? Instead of having to plug operating deficits with fundraising, the best operators would have the resources they need to expand. If the bottom 10 percent charter schools received less, we might hasten the closure of chronically bad charter schools at the same time.

Fast exponential growers also intensely seek out ways to reach more customers in different ways. Think Starbucks selling coffee on grocery store shelves, reaching millions who don’t live near a Starbucks. What if charter operators could similarly reach students without setting up entire new schools, sidestepping the need for a school leader and facility? What if they could engage in “micro-reach,” supporting select teachers in existing schools to deliver their programs in their own classrooms? What if a teacher, a small team of teachers, or a community-based organization could form a “micro-charter,” serving just 10, 20 or 100 students without the a full-scale school building and administrative structure?

These are just a few examples from the report, and just the tip of the iceberg of what innovative thinkers within the charter sector will likely come up with if they start applying the lessons of rapid growers to the best charter operators.

Can you share examples of any organization — for-profit or non-profit — that has grown at a 40% compound growth rate for 10 years? I can’t imagine where the “hundreds” of examples might come from. I honestly can’t think of a single business or organization that has exhibited such spectacular growth for an entire decade.

I would love to see the most successful charters propagate throughout the country, but that seems unlikely, given that most are not that growth-oriented in terms of culture or organization. And understandably so. The best ones are focus first and foremost on serving current students as well as they can. It is hard to imagine an intense focus on achieving such radical growth being compatible with the day-to-day business of student learning.

There is potential, I think, for more efficient sharing of the best models, so that new charters can tap into best practices from around the country. And of course, the best recipe for charter growth is to continue to remove all of the senseless and reactionary barriers that the ed establishment has placed in front of charters, at the local and state levels.

In the private sector, the barriers to starting a new business are minimal. Imagine if a would-be start-up had to secure permission from the current market leader in order to begin operations? That’s the situation that most would-be charter operators are in. The charter approval process should completely bypass the local district because the district has a financial interest in squelching competition from the charter.

Figure 1 goes out to 16 years. The report discusses 40% annual growth for 10 years. Why draw the graph for 16?

The assumption used for the graph is that the CMOs start with 20 schools. The Mathematica report shows only 8 states as of the 2008-09 school year with 20 or more CMO operated schools – and 478 schools for 83 operators total in those 8 states – or about 5-6 schools for each CMO.

So how many CMOs fit your model of having 20 schools now? Are the assumptions that form the basis of your graph based in any reality?

I also agree with the commenter above that no examples are given for the “hundreds” of non-profits that have grown 40% a year for a decade.

Thanks very much for the comments. Organizations you might recognize that sustained average annual growth rates of 40% or more for over a decade include Home Depot, Starbucks, Staples, CISCO, eBay, Walmart, Career Education, Apple and Habitat for Humanity (# of houses built). Not all stayed that high every year, but the ones that stumbled came back to maintain the high average over time — many much higher than 40%, and some for much longer than ten years. Many exponential growers are household names, but some are not, even though they often dominate their niches. If you are interested in more examples, David Thomson’s Blueprint to a Billion lists many and provides charts of sustained growth rates far exceeding 40%. In our paper, you will also find the citations to cases we use as examples. I agree that maintaining the focus on quality should be the essential twin of growth for the charter sector’s best providers, and I encourage you to read the full paper. You will find many examples of how organizations dealt with growth while keeping the founders’ visions — for quality, service, price, convenience, etc. — alive. My co-authors, Bryan Hassel and Joe Ableidinger, and I also agree that removing policy barriers preventing growth by high-performing charter schools is very important, and you will find that among our recommendations. Thanks, again.

Thanks also for the question about Figure 1. Figure 1 is solely an illustration of the difference between 10, 20 and 40 percent compounded growth for an individual CMO as a hypothetical example. This figure is not making a claim about how many schools CMOs today have, only the impact of different growth rates for a CMO. If we had used 1 or 5 schools as our starting point, the numbers would have of course been different – but the difference between 10, 20 and 40% growth rates would be in the same proportion, and the graph would look the same. Growth rate differences matter a lot, even for excellent stand-alone schools planning their futures.

Just to clarify, Figure 1 includes 20 percent growth along with 10% and 40%, and it projects for additional years. In the text, we just selected the 10-year 10 vs 40 comparison as one snapshot from Figure 1 to highlight. Fifteen year differences are even more substantial. Many organizations that have sustained that level of growth, or higher, for that long are household names — most listed in my previous comment post are in that category.

For sector-level projections, see Figure 2. Here we use as the starting point 10 percent of the actual number of charter slots in existence today. The projections however are hypothetical, to show how consequential growth rates of the best charter schools would be at the sector level.

In 1970, there were about 15.
In 1980, there were about 250.
In 1990, there were about 1300.
In 2000, there were about 2900.
In 2010, there were about 4100.

None of the above 10 year periods demonstrate 40% annual growth in the number of stores. Since your report is funded by the Walton foundation, I thought this was a relevant comparison. I cannot be sure of the accuracy of the source of my numbers, so I am open to a dispute from someone with a better source.

“The key: Each Blueprint company operated in a market big enough and fast growing enough to support at least one billion-dollar firm.”

Is education such a market? No.

And again your graph in figure 2 goes out 15 years. It a simple matter of math. Of course the majority of growth takes off at the end of the graph. That’s just a calculation.

I looked up Habitat for Humanities numbers in their annual reports. In 1999, they built 13,682 houses. In 2009, they served 61,000 families. Not exactly equivalent – but not that different from your thought of expanding how CMOs serve children by different models.

That’s ~4.5x over 10 years. That’s a compounded growth rate of about 16%.

Examples of 40% growth for > 10 years? Still looking for relevant comparisons.

As noted in the Lessons section and explanatory notes in our paper, the growth figures for for-profit organizations represents growth in revenue. Revenue growth is generated by additional sites, delivering more services and products to customers at current sites, and in some cases charging more (but in others, charging less per item at larger scale).

Reliable data are available in annual reports required by the Securities and Exchange Commission for publically traded organizations. Based on review of these data, there simply isn’t any doubt that some number of organizations grow at sustained, high exponential rates.

If KIPP Newark (1050 students 2009-10 school year), Robert Treat (500), and North Star (909) grew at 40% per year for 10 years, they could serve all 82,000 kids the Opportunity Scholarship Act in NJ aims to serve – and they would run ~130 schools.

KIPP nationwide now serves 26,000 students. KIPP was started in 1994 – 17 years ago.

And these folks are among the best of the best.
Does this help put your hyperbole in perspective?

The charts posted by the commenter show companies’ growth AFTER they had already achieved massive scale. If any charter organization reached the size of organizations like Home Depot, even if its growth stopped there, it would be serving far, far more students than today. Had the commenter produced charts covering the whole lives of these companies, we would see the sustained rapid growth periods within these. Sure, growth is bound to level off when an organization has reached most of its potential customers. The best charter school operators today are nowhere near that point.

This was news to me, so I appreciate your noting that example, and I’ll assume your other examples are also correct. The interesting issue you raise (what if charter organizations could grow as fast as the best in other industries?) got me to thinking about the first time I went into a Home Depot. I could tell exactly what they were selling, and I could quickly see that the drill that my lumber yard was selling for $49.99 was selling at HD for just $39.99. Same drill, $10 less, what’s not to like? When you are selling familiar commodity-like goods at lower prices with better selection, there’s potential for dramatic growth. But I would argue that businesses like HD and Wal-Mart that distribute commodities, and online businesses like eBay and Facebook, which operate without much physical infrastructure, may not provide relevant growth examples for charter schools.

Consider the ordeal that the organizers of a new high school charter are going through in my school district. There is widespread dissatisfaction with the existing high schools, but there are also many, many questions about the charter’s new approach, which happens to be a “blended model” using an online curriculum with liberal onsite coaching and instruction. Parents can even drive 25 miles into San Francisco and see an existing “branch” of the school in operation. When I did that, the model made perfect sense to me. But the concept is not an easy sell for most parents. They want to know how the online instruction is presented, how qualified the teachers are, how often students get help, what the other students are like, and many, many other very reasonable questions. Education is often about “the devil you know” versus the “devil you don’t know”. It is certainly not a commodity service. Parents are good “shoppers”, by and large, but comparisons take time. As for the students…well, if you’ve had a teenage child, you know that they can be some of the most change-resistant individuals around. And of course, it is hard to say to your child, “Let’s try this new school for a month or two, and if you don’t like it, you can go back to your old school (where you will have lost your place in all of your most desired classes).” If you want to try a charter, it’s usually for a whole year, so it requires a big commitment.

In marketing for growth, we all know that it is important to generate “awareness” among prospective customers, and then generate “trial” or “sampling”. I think charters have done pretty well calling attention to themselves, but it is difficult for prospective parents and students to sample the product, particularly in the suburban areas that offer some of the biggest opportunities for charter growth. In those communities, the schools may be uninspiring or mediocre, but they aren’t usually the “escape at any cost” train wrecks that we find in many urban areas. The prospective customers in the suburbs aren’t as desperate, and the choices are more subtle. All of this suggests, to me at least, there there will be more challenges for charters as they focus on the huge suburban market, and possibly slower growth than we have seen in urban areas.

Starbucks stores grew from 17 at year end in 1987 to 1412 at year end in 1997 – a compounded annual growth rate of ~55%.

So there is your analogy.

Since they didn’t go public until 1992 when they had 165 stores, a full revenue growth comparison for that period isn’t possible. From 1992 to 2002, they grew stores at a 43% rate. Their website only has annual reports since 1999 – so again difficult to judge revenues – or debt that helped fund this expansion.

A single CMO could conceivably grow by cannibalizing other CMOs – but this doesn’t help serve more children. The CMO would need to achieve this charter market growth by taking over existing traditional public schools – especially in light of the need for infrastructure – buildings, playgrounds,…

I think this makes the Milwaukee takeover of the largest 100 districts analogy even stronger.

Of course, the CMO would have to open all its new “stores” within about a month’s time each August/September – quite the feat!

Alternatively – we CAN spread best practices from charters to traditional public schools like wildfire, if we put our focus on this. But that isn’t as sexy to ed reformers is it?

30 Barringer et al., “Characteristics of Rapid-growth
Firms and their Founders;” and Thomson, Blueprint
to a Billion. Thomson found that 5 percent of public
companies during the period studied sustained these fast
growth rates UNTIL REACHING A BILLION DOLLARS IN REVENUE.

$1 billion / $7500 annual tuition = 133,333 students

You use your model until 13 million kids – or at $7500 per kid = $97.5 billion.

Anne — Agree with your numbers, but not your conclusions about spreading “best practices from charters to traditional public schools”. There have long been plenty of valuable innovations in public education that COULD have spread like wildfire and SHOULD have spread like wildfire, but didn’t. Why not? Because significant change is hard for almost any organization, and it is particularly hard for a government monopoly that has never been oriented toward customer responsiveness in the first place. Big change and innovation means budgets get reallocated, people have to assume new roles and duties, priorities get reshuffled, sometimes new talent is needed, and some people can’t adjust and need to leave. Organizations do it when they have no other choice to continue growing or to survive — usually when revenue is dropping and their customers are leaving in droves. Most school districts do not yet face that kind of threat, because the parents do not have many choices, and per student revenue just keeps coming in, so long as the students keep coming through the doors. Even when systems like Detroit and Kansas City wither down to one-half or one-third their former size, they still find it hard to make necessary adjustments. It will take a LOT more school choice before most districts make the tough changesand respond quickly enough to have innovation spread like “wildfire”. We keep thinking that we can somehow get more accountability without giving end-users more choice, and it never works out that way.

Similarly, Education Pioneers
offers internships with education nonprofits,
including charter management organizations,
to potential “imports” from MBA, law, and
policy graduate programs, nearly 300 in the
summer 2010 program; 70 percent of the interns
go on to take full-time jobs in education.74

Did you check out the bios on this website? Seems like more of these folks work for McKinsey than for charter schools. In fact, a chart on the website shows at best 20% working for charter schools – and when I checked the bios of the 2004 and 2005 fellows – only a handful are working in schools.

k12reboot – I’d like to know the charter school with the best math results on an 8th grade state assessment or the SAT in the US.

Here in NJ, it’s North Star – and yet the average math SAT score for 2009-10 was 516. The 25th percentile was 440 (ouch!), 50th at 525 (still looking at college remediation), and the 75th at 580 – the 69th percentile for college bound seniors. Will the top 25% have any chance succeeding in a STEM major? Unlikely.

The math average places them at 152 of 375 schools in NJ.

The next highest charter high school in NJ had an average SAT math score of 400 – the 75th percentile was 460.

Please – if you have examples of charter high schools that are doing a truly great job – list them. Thanks!

Cisco had its first billion+ revenue year in 1994. In 2004, their revenues were about $20 billion. This is a compounded annual growth rate of about 35%. I’m still not getting to 40%.

You say it was largely fueled by acquisitions. The only “acquisitions” that will expand the number of low-income children served by charter schools, vs. shifting which charter schools they attend, are those that “acquire” traditional public schools – leading once again to the Milwaukee takeover of the 100 largest schools analogy.

Fact check: Home Depot’s revenue grew from about 22 million in revenue in 1980 to about 38 billion in 1999, a compounded growth rate of about 48%. The rate was even higher in the first of those decades. The rapid growth time periods of organizations were of greatest interest for this particular paper, since all level off at some point. Ed pioneers website states: “70% of Education Pioneers Alumni go to work full-time in the field of education following graduate school.” And our paper thus states: “70 percent of the interns go on to take full-time jobs in education” (not necessarily charter schools).

Let’s move on from whether some organizations grow fast to what matters for children . . . how an understanding of that phenomenon might help truly excellent charter schools – and district schools they might help or influence — serve more children in need.